Contract Labour: Disparity, Judicial Approach and the New Labour Codes

By – Shreya Dubey and Debasmita Goswami

Table of Contents

The share of the contract workers in India’s formal manufacturing workforce has grown from 23.1 percent in 2002-03 to 40.02 percent in 2021-22, indicating a rising trend of hiring unskilled and migrant labour.¹ While this workforce did find recognition and protection under the Contract Labour (Regulation & Abolition) Act, 1970 (Contract Labour Act)², the said Act stands repealed by the Occupational Safety and Health and Working Conditions Code, 2020(OSH Code)³. The OSH Code which has been implemented effective 21.11.2025, dedicates special provisions towards the treatment of contract labour and migrant workers to ensure equal social treatment and facilities at the workplace while the wage disparity issue has been addressed under the Codes on wages, 2019 (“Wage Code”),⁴ which strictly prohibits discrimination in matters of pay/ gender amongst others. 

The OSH Code recognises Contract Labour as “a worker who shall be deemed to be employed in or in connection with the work of an establishment when he is hired in or in connection with such work by or through a contractor, with or without the knowledge of the principal employer and includes inter-State migrant worker”.

Contract workers are not directly employed but are hired through contractors/ third party agencies and are not given the same employment protection given to regular employees, their status is therefore temporary in nature. However, despite absence of formal employment terms, there has been a growing reliance on the contractual workforce which is due to various factors such as more flexibility in the workforce management, cost considerations amongst others. Studies have also revealed that over the first decade of the 21^st century contractual workers have steadily substituted directly hired workers in the organized manufacturing sector.⁵

In India, the use of Contract Labour has been widespread since the early industrial times specifically in the mining, construction, cotton ginning, pressing and tobacco industry. These industries now include the manufacturing sector as well, which demands both unskilled and  skilled manual labour despite the technological advancement in machines.  Especially in the construction and manufacturing industry, they are the preferred source of hiring due to lower wages, large scale availability, savings on employment benefits and flexibility of firing without going through the hassle of exit procedures. 

Contracting and its associated challenges :

While employment of Contract Labour offers both flexibility in employment and relief from social employment obligations such as gratuity and bonus, such employment comes with its own set of challenges and problems including but not limited to:  

1. Power of the head man: 

Since the Contractor controls the workers’ access to employment, conditions of work and wages, Contract Labour is often discriminated on casteism and subjected to poor working conditions. The Contract Labour Act, did to a certain extent provide for welfare provisions such as water, sanitation, safety safeguards directly by the principal employer, there was lack of enforcement of these mandates due to poor vigilance and menial penalties on the principal employer. OSH Code, addresses this problem by holding the Contractor and Principal Employer equally accountable by licensing the activity of contracting and giving it a formal recognition. The Contractor is now subjected to the terms & conditions of such license and also made to make a deposit with the government for the security of Contract Labour, thereby regulating conduct of such Contractors.

2. Charging of commission by the Contractor:  

Contract labour hailing from small villages, often give into the temptation of a steady income in exchange for a cut/commission from the monthly fixed wages, which is deducted by the Contractor before passing on the balance wage. With the implementation of the OSH Code, this activity has been specifically prohibited, although its success cannot guaranteed. The deposit made with the Government at the time of grant of License may be used as a leverage by the Contractor while negotiating recruitment of the Contract Labour.

3. Under manning and exhaustion: 

Contractors or sub-contractors who undertake works on lump-sum basis, or who are renumerated on a piecework basis, often recruit a smaller number of workers in contrast to actual requirement, leading to fatigue and exhaustion. While working hours have been regulated under the OSH Code, the same can hardly be implemented in remote locations.

4. Large scale child labour:

Where contract workers are recruited in family groups, children of below the statutory minimum age for employment are often made to work alongside the other members of the group in the expectation of higher family income. Contractors overlook violation of basic fundamental rights as long as more hands are available on the site. At remote sites, such violations remain unnoticed by labour inspectors.

5. Disparity in wages and working conditions: 

Where workers engaged through labour contractors are employed alongside regular workers of the principal employer, differences in the wage and other conditions of the two groups may be considerable. This has been regulated under the OSH Code by completely prohibiting employment of contract labour in core activities of the establishment.

Wage & Employment disparities: Indian Jurisprudence 

In the matter of regularisation/ absorption/ wage disparity, the Indian Courts have forever maintained that if the contract between the principal employer and the contractor is found to be a sham, nominal or merely a camouflage to deny employment benefits to the contract labour when there was infact a direct employment, courts can grant relief to the contract labour by holding that the contract labour is the direct employee of the principal employer.⁶ The Supreme Court in various precedents has laid down the tests to determine and distinguish contractual engagement from regular employment.

In the case of Balwant Rai Saluja Vs. Air India Ltd.⁷ the Supreme Court has determined the relevant factors to be taken into consideration to establish an employer-employee relationship which would include i) Who appoints the workers; ii)Who pays the salary/renumeration; iii) Who has the authority to dismiss; iv) Who can take disciplinary action; v) Whether there is continuity of service; and vi) Extent of control and supervision i.e. whether there exists complete control and supervision. Proof of appointment letter, provident fund number, wage slips have been held to be of evidentiary value while determining existence of direct relationship between contract labour and principal employer.⁸

Further in the case of International Airport Authority of India Vs. International Air Cargo Workers’ Union⁹ the expression “control and supervision” in the context of contract labour was explained by the Supreme Court. It was observed that if the contract is for supply of labour, necessarily, the labour supplied by the contractor will work under the directions, supervision and control of the principal employer but that would not make the worker a direct employee of the principal employer, if the salary is paid by the contractor, if the right to regulate the employment is with the contractor, and the ultimate supervision and control lies with the contractor. The principal employer only controls and directs the work to be done by a contract labour, when such labour is assigned to him. But it is the contractor as employer who chooses whether the worker is to be assigned to the principal employer or used otherwise.

While the above principles laid by the Supreme Court continue to apply, a peculiar anomaly arises in case of such Contract Labour who continue to be employed indefinitely in an establishment through a Contractor and performing the same roles as regular employees of the Principal Employer. This issue came up before the Supreme Court recently in the case of Municipal Council Vs. K. Jayaram and others¹⁰ (“Jayaram case”), whereinMunicipal Council had continued to engage the same set of contract workers for three decades through different third-party contractors, compelling the workers to approach the courts seeking regularization and payment of the minimum of the scale of that post which was given to the regular employees.While adjudicating upon the issue of whether workers hired through contractors can claim equal status as regular employees, Supreme Court observed that test which would actually would be relevant is to determine whether the relationship, which is direct between two parties in “whatever manner”, can be differentiated with a relationship which had no direct connection with the two parties who are contesting, but rather the relationship is through a third-party which was the Contractor.

If the distinctions between a regular employee and contractual employee is not made, then the basic concept of hiring through various modes and in different capacity would lose its purpose and sanctity and everybody would be getting the same benefit. The Supreme Court further observed that the core difference between a regular and a contractual employee is that in a regular employment , directly made by the State entity there are safeguards to ensure that the system of employment  is transparent and fulfils a minimum criteria and is open to all eligible persons and a procedure is adopted for ultimately choosing the right person. When the workmen are taken through the contractor it is the absolute discretion of the contractor as to whom and through which mode he would choose such persons to be sent to the principal.

The Supreme Court further stressed that the reason why there are safeguards in regular appointment is that there should not be any favouritism or other extraneous consideration where persons, only on merit, are recruited through a fully transparent procedure known in law. If the persons who are employed through a contractor, and have come to work, are given equal benefit and status as a regular employee, it would amount to giving premium and sanction to a process which would be totally arbitrary as there is no mode prescribed in any contract as to how the contractor would employ or choose the persons who are to be sent, except for the basic qualification, i.e., knowledge in the field for which they are required.

However acknowledging the ground reality of the situation and on the tenets of justice, the Supreme Court in this specific case carved out a special exemption on humanitarian grounds by directing the Municipal Council to consider the cases for regularisation on compassionate grounds and in view of the long service rendered by the Contract Labour by observing as under:

“11. Having passed the order, we feel that sometimes justice is required to be tempered with mercy as human factors cannot be totally lost sight of. In such view of the matter, we would require the appellant to look into whether the jobs which were being done by the respondents, in the background that they have not been disengaged or returned to the contractor on the ground of being unsatisfactory, having uninterrupted service under the appellant for decades can be regularized on posts, which prima facie appears to be perpetual in nature. We make it clear that this direction is limited for the purposes of the present case only as it has been passed in the special facts and circumstances of the present case and shall not be treated as a precedent in any other case. We expect the appellant to take a compassionate and sympathetic view in the matter.”

The aforesaid compassionate observations were made only in the exceptional case of Contract Labour which continued to work for more than 3 decades at the instance of the Municipal Council, although the Contractor was replaced on multiple occasions. It cannot be taken as a binding precedent. 

Conclusion

In view of the settled judicial precedents on the subject, while contract workers cannot be placed at parity with regular employees, who undergo a proper process of recruitment, going forward, the vulnerabilities faced by such workers have been addressed in the OSH Code and the Wage Code.

The Wage Code recognises a statutory right to minimum wages for all employees, extending its coverage to every sector, both organised and unorganised, thereby ensuring minimum pay for every employee, irrespective of industry, category, or nature of employment. 

The OSH Code aims to balance the twin objectives of safeguarding social rights and safe working conditions by ensuring that the Contractor is specifically licensed to engage contract labour, which license shall only be granted on payment of a deposit with the Government. The Contractor has been barred from directly or indirectly charging any fee or commission from the contract labour, thereby empowering the Contract Labour to approach authorities in case of violation of terms of license by the contractor. Importantly, contract labour have been empowered to demand experience certificates from the contractor, which as it appears has been provided to enable and encourage contract labour to apply for regular employment. 

Most importantly, and as is relevant for the purpose of discussion here, the OSH prohibits employment of contract labour in any core activities of any establishment. The term core activity has been defined as “any activity for which the establishment is set up and includes any activity which is essential or necessary to such activity”. The State Governments have been empowered to appoint a designated authority to advise the Government on the question whether any activity of an establishment is a core activity or otherwise. The intention is to ensure that establishments engage in only permanent hiring where core activities are involved and not employ contract labour to perform the same tasks, all in a bid to save costs. This will create a level playing field for the same position and job roles. 

The OSH Code also ensures providing of welfare facilities such maintaining cleanliness, providing portable drinking water, adequate lighting, effective arrangements for treatment of wastes and effluents etc. In case the Contractor fails to make payment of wages then, the liability shall pass on to the Principal Employer. Unpaid wages can also be recovered from deposit made by the Contractor at the time of grant of license. OSH Code would thus aid in providing social and economic protection to the Contract Labour. 

Importantly, considering that majority Contract Labour are Migrant workers, they have been extended the benefits under the Employees’ State Insurance Act, 1948 and the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 along with all other facilities of medical check-up, and a special travel allowance. With the implementation of the OSH Code and Wage Code, the jurisprudence on regular vs contract labour will take a new shape and hopefully the newly implemented statutory enactments will safeguard what judicial intervention could not, due to limitations under the older statutory framework.

FAQs

References –

1. Please see, Kulvinder Singh (2024). “The contractualisation of workforce in India’s factories continues” Centre for Economic Data and Analysis (CEDA), Ashoka University.
2. Contract Labour (Regulation & Abolition) Act, 1970
3. Please see, Occupational Safety and Health and Working Conditions Code, 2020
4. Please see, Codes on wages, 2019, aA2019-29.pdf
5. Please see Radhicka Kapoor & P.P. Krishnapriya (2019), “Explaining the contractualization of India’s workforce” Indian Council for Research on international Economic Relations.
6. Bengal Nagpur Cotton Mills Vs. Bharat Lal: (2011)1 SCC 635
7. Balwant Rai Saluja Vs. Air India Ltd. :(2014) 9 SCC 407
8. Bharat Heavy Electricals Limited Vs. Mahendra Prasad Jakhmola and Others: 2019 13 SCC 82
9. International Airport Authority of India Vs. International Air Cargo Workers’ Union :(2009) 13 SCC 374
10. Civil Appeal arising out of SLP(Civil) No. 17711/2019, Order dated 16.12.2025.

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